A handful of major triple-A CDO buyers have postponed buying cashflow CDOs due to fear of spread widening at the top of the capital structure.

One frequent buyer reports seeing decent-sized blocks of recently-issued triple-A arbitrage cashflow CDO paper offered in the secondary market at par and in for the bid.

"I don't want to be in a situation where I'm buying new issue CLO paper and have my portfolio marked five points back shortly thereafter," the investor said.

Earlier in the summer, new issue triple-As cleared in the 42 to 43 over three-month Libor range, and are now trading at Libor plus 48 to 50.

The investor added that upper tier managers - those with long and fairly clean track records, such as Invesco - can apparently still dictate the terms of their offerings and will likely price at tight levels.

Invesco is marketing the mezzanine debt on a $300 million ACF CLO via Lehman Brothers that will likely print in early September. Also, Four Corners Capital Management has launched the debt on its first arbitrage cashflow CLO, with the triple-As talked in the 43 basis point area over three-month Libor (WAL 8.5-10). CIBC World Markets is underwriting the transaction.

For lesser-known managers, placing debt, including the triple-A tranches, has become a difficult exercise. Oddly, for some managers, it is more difficult to place the debt than the equity, sources said. Another challenge for managers is sourcing collateral as the loan market becomes tightly bid from a long list of CLOs constantly ramping up.

Landmark out with

smaller deal

Meanwhile, Aladdin Capital Management's $400 million CLO-ACF, Landmark II, has been downsized to $250 million, and price talk on the triple-As is now 45 to 47 basis points over three-month Libor, out from 43 to 45 basis points. Mizuho Securities and Banc of America Securities are co-bookrunners on the deal.

Landmark II has structured in a deflection test whereby if the class D overcollateralization dips below 102.7% (102.1% trigger), 50% of the cashflow to the equity holders is redirected to purchase new collateral until the test is cured. The class D is expected to be about 106% at closing. The $24 million, double-B rated tranche is talked at +260 over three-month Libor.

Landmark II is said to be fully ramped up at this point. According to sources, a smaller deal was more manageable for the asset manager, since collateral has become more expensive and harder to find. Aladdin was established in early 2001 and has issued a handful of CDOs thus far - all believed to be performing within expectations.

The above issuers and underwriters could not be reached for comment.

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